IIROC
​IIROC Enforcement Proceedings

Branch Manager Receives Lower Than Requested Penalty for Failure to Supervise
Re Ahrens 2014 IIROC 46

A IIROC Hearing Panel had decided that the Respondent did not take adequate steps, on either a daily or a monthly basis, that were reasonable in light of various red flags and significant information from compliance and others, including credit, provided to him or available as a Branch Manager in respect of his supervision of the trading activity of one registrant in respect of two securities in certain client accounts. At the penalty hearing, IIROC sought the following penalties and costs:

  1. A six to eight month suspension from registration in any supervisory capacity with IIROC;
  2. A fine of $35,000.00;
  3. A rewrite of the Branch Manager’s course or its equivalent, should the Respondent reapply for registration in any supervisory capacity; and
  4. Costs of $20,000.00.

The Panel instead ordered:

  1. A four week suspension;
  2. A rewrite of the branch manager’s course on or before December 31, 2014.
  3. $15,000.00 in fines;
  4. $5,000.00 in costs;
  5. The fine and costs were payable over a two month period;

In so holding, the Panel noted:

  1. There was no evidence of harm to clients, the employer or the market in this case;
  2. The Respondent acknowledged that he had the responsibility and the opportunity to review and monitor the investment advisor’s activity;
  3. The Respondent did not participate at any of the investment advisor’s activity;
  4. There was no evidence that the Branch Manager was enriched by the investment advisor’s conduct;
  5. The Branch Manager had received no previous disciplinary history and there was no evidence of any complaints after the events under consideration;
  6. The Respondent accepted full responsibility, acknowledged his misconduct and spoke as to remorse; and
  7. The Respondent was fully cooperative throughout the investigation and disciplinary process.

The Panel noted that the majority of the authorities relied upon by IIROC counsel pertained to branch managers who, at the time of the decision, were no longer in a supervisory role but had continued employment in the industry as investment advisors.

This Respondent did not have an active book of clients and therefore continuing as an investment advisor was  not open to him. In addition, the panel viewed the Respondent’s conduct as properly characterized as an error in judgment in a narrow period of time regarding one investment advisor. There was no suggestion and no evidence that there was conduct involving manipulative, fraudulent or deceptive practices.

Finally, the Panel considered the Respondent’s personal circumstances, including his negative net worth and the fact that a significant suspension or fine would likely be career ending. To the Panel’s mind, that would serve no useful purpose, particularly given that this was approximately five years post the event in question.

The full text of the decision can be read here.

Personal Financial Dealings with Clients: IIROC Discipline Follows Internal Fine
Re Sydney Azancot, 2014 IIROC 44 DN

A settlement agreement reached between Sydney Azancot and IIROC Staff whereby Azancot agreed that he had engaged in personal financial dealings with a client without the knowledge of his employer, and that he had misled his employer in his responses on his annual disclosure forms respecting his personal dealings with clients. His contraventions were found to be in violation of Dealer Member Rule 29.1.

The first contravention covered a period from October 2008 to December 2012. During this time, Azancot advanced multiple cash loans to a client, totaling $133,000.00.

The second contravention was in respect of the annual disclosure forms for 2009, 2010, 2011 and 2012. In the disclosure forms, Azancot was required to inform his employer whether he (a) was acting as a trustee for an individual, and (b) whether he had loaned money to a client. Azancot replied in the negative to both questions when, in fact, he was acting as a trustee for a family member’s trust and he had loaned money to a client.

In 2013, his employer conducted an internal investigation and found that Azancot had committed the two contraventions. He was fined a total of $20,000.00, placed on strict supervision and required to rewrite the Conduct and Practices Handbook Course.

Despite the internal investigation and fine, in the settlement agreement, Azancot agreed to pay an aggregate fine of $15,000.00 to IIROC and costs in the amount of $3,000.00.

The full text of the settlement agreement can be accessed here.

MFDA
MFDA  Enforcement  Proceedings

Unauthorized OBA and Referral Fees
Re Alfonso Chin, File No. 201361

The MFDA approved a settlement agreement in circumstances where the respondent, Alfonso Chin, acknowledged having engaged in securities related business outside the Member by referring or facilitating the sale of at least $3,105,000.00 worth of investments in a mortgage investment corporation to two clients and eleven other individuals, contrary to MFDA Rules 1.1.1(a) and 2.1.1. Chin also admitted to receiving at least $102,053.56 in referral fees for referring or facilitating the sale of the investments.

Chin agreed to the terms of settlement which included a fine in the amount of $30,000.00, a permanent prohibition on his authority to conduct securities related business in any capacity while in the employ of any MFDA Member, costs in the amount of $2,500.00, and attendance at the Settlement Hearing in person.

A full text of the Reasons for Decision approving the settlement can be read here.

Non-Approved Persons Conducting Securities Related Business
Re Blair Stonewall Jackson Roche, File No. 201420

The MFDA approved a settlement agreement in circumstances where the Respondent, Blair Roche, admitted to permitting two non-Approved Persons to conduct securities related business with clients through the Member, contrary to MFDA Rules 1.1.1(c), 1.1.2 and 2.1.1; and further admitted to producing and distributing approximately 80 portfolio summaries to approximately 45 clients without the knowledge or involvement of the Member, thereby interfering with the ability of the Member to supervise the respondent, contrary to MFDA Rules 1.1.2, 2.5.1 and Rule 2.1.1.

The Respondent further admitted to violating MFDA Rule 2.1.3 by producing portfolio summaries for clients who were spouses that disclosed the spouses’ individual accounts on the same portfolio summary without the clients’ prior written consent to authorize the sharing of individual account information.

The Respondent agreed to pay a fine in the amount of $12,500 and costs in the amount of $2,500. He further agreed to a prohibition from conducting securities related business in any capacity while in the employ of or associated with any MFDA member for a period of three (3) months.

The full text of the settlement agreement can be read here.

Pre-Signed Forms and Discretionary Trading – MFDA Orders Voluntary Payment to Clients
Re Mervyn Jacheil Fried, File No. 201242

The MFDA approved a settlement agreement in circumstances where the Respondent, Mervyn Fried, acknowledged having failed to learn the essential facts relative to the opening of two joint accounts for his clients DH and EH, including the clients’ risk tolerance, time horizon, and investment objectives, in violation of MFDA Rule 2.2.1(a). He further acknowledged having failed to obtain a New Account Application Form in respect of the two joint accounts, in violation of MFDA Rule 2.2.2.

Fried also acknowledged having obtained signatures of the same clients on blank order entry forms, which he then used to execute trades in the clients’ accounts in violation of MFDA Rule 2.3.1, which prohibits discretionary trading even in instances where it is authorized by clients. Fried further agreed that he had made unsuitable recommendations to his clients having regard to the clients’ personal circumstances, including risk tolerance, time horizon, and inability to withstand investment losses.

Finally, Fried acknowledged having used blank signed forms with other clients, contrary to MFDA Rule 2.1.1, and having collected remuneration and fees totaling $9.953.00 directly from 21 clients in relation to business carried on by Fried on behalf of the Member, thereby violating MFDA Rules 2.4.1, 1.1.(b) and 2.1.1.

As a result of his misconduct, the MFDA ordered a permanent prohibition on the authority of Fried to conduct securities related business, a global fine in the amount of $30,000.00; and costs of $10,000.00. Mr. Fried further agreed to make a voluntary payment of $25,000.00 to his two clients DH and EH.

A full text of the settlement agreement can be read here.

MFDA Publications
MFDA Releases Status Report on Payment of Fines

The MFDA has started to release the status of unpaid fines for all respondents ordered to pay fines by MFDA Hearing Panels. On the MFDA website, there is now a column under “Completed Cases” which indicates whether an Order Payment Status is paid or unpaid.

In its 2014 fiscal year, MFDA Hearing Panels levied fines against Approved Persons who are currently registered totaling $54,500, all of which have been collected. Hearing Panels imposed fines of $3,642,500.00 against Approved Persons who are no longer registered, of which $51,000.00 has been collected.

The status of fine payments can now be found here. These figures will be updated quarterly, on an ongoing basis.

OSC

Ernst & Young and OSC Agree to No-Contest $8 Million Settlement over Sino-Forest and Zungui

The first of the OSC’s no-contest settlements occurred in October. Ernst & Young LLP (“Ernst & Young”) entered into a no-contest settlement agreement with the OSC in respect of allegations related to its auditing of Sino-Forest Corp. (“Sino-Forest”) and Zungui Haixi Corp. (“Zungui”) (the “Settlement Agreement”).

At the hearing to approve the settlement held on September 30, 2014, Ernst & Young agreed to make a voluntary payment to the OSC in the amount of $8 million in total, allocated as follows:

  1. $6.5 million for the Sino-Forest Proceeding, of which $1.5 million is to be allocated to the Commission’s costs of the investigation, and the balance shall be designated for allocation to third parties or for investor education, in accordance with subsections 3.4(2)(b)(i) or (ii) of the Securities Act; and
  2. $1.5 million for the Zungui Proceeding, of which $600,000.00 is to be allocated to the Commission’s costs of the investigation, and the balance is to be designated for allocation to third parties or for investor education, in accordance with subsections 3.4(2)(b)(i) or (ii) of the Securities Act.

In its reasons, the OSC panel stated that the $8 million payment likely exceeded penalties that could have been imposed on Ernst & Young following a contested hearing. The terms of the settlement were described as unprecedented in Canada and consistent with SEC practices.

The OSC Staff’s core allegation against Ernst & Young was that it had failed to conduct audits of year-end financial statements of a reporting issuer operating in the People’s Republic of China (“the PRC”) in accordance with generally accepted auditing standards (“GAAS”), resulting in breaches of the Securities Act.

The Commission stated that it took into consideration a number of mitigating factors in the Settlement Agreement,  including:

  1. Ernst & Young settled class action lawsuits relating to its audits of the financial statements of Sino-Forest before the Ontario Superior Court of Justice (the “Ontario Court”), Quebec Superior Court and United States District Court for the Southern District of New York and relating to its audits of the financial statements of Zungui before the Ontario Court by paying a total of $119 million to shareholders and noteholders of Sino- Forest and shareholders of Zungui;
  2. OSC Staff did not allege, and found no evidence of, dishonest conduct by Ernst & Young; and
  3. Ernst & Young co-operated in the investigation by providing Staff with an affidavit sworn by one of its partners.

The full text of the Settlement Agreement can be read here.

Please click here to read a previous Securities Snapshot publication on no-contest settlements.


OSC Publishes Rules Regarding Disclosure of the Number of Women on Boards and in Senior Management

The OSC, along with the securities regulatory authorities in Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Québec and Saskatchewan, all announced the final implementation of amendments to National Instrument 58-101 Disclosure of Corporate Governance Practices and Form 58-101F1 Corporate Governance Disclosure, the highly anticipated rule amendments regarding the disclosure of the number and proportion of women on boards and in senior management. Pending Ministerial approval, these amendments come into effect on December 31, 2014, in time for the 2015 proxy season.

Once in effect, the final amendments will require non-venture issuers to provide annual disclosure regarding the following items in their proxy circular or annual information form:

  • director term limits and other mechanisms of renewal of the board;
  • policies regarding the representation of women on the board;
  • the board’s or nominating committee’s consideration of the representation of women in the director identification and selection process;
  • the issuer’s consideration of the representation of women in executive officer positions when making executive officer appointments; and
  • targets regarding the representation of women on the board and in executive officer positions, and the number and proportion of women on the board and in executive officer positions.

OSC Launches a New Web-based Tool: ‘Topical Guide for Registrants’

The OSC launched a Topical Guide for Registrants (“the guide”), a new web-based tool which allows registrants to search for and access OSC registration and compliance-related guidance by subject matter area with links to relevant information compiled by OSC staff. The guide provides a single source destination for OSC and CSA guidance on current initiatives.

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